USD: Short term backdrop has improved - JPMorgan

FXStreet (Bali) - Niall O'Connor, FX Strategist at JPMorgan, notes that the USD short term backdrop has improved in recent weeks, although recognizing that key hurdles lie ahead.

Key Quotes

"The setup for the broad USD picture has improved over the past few weeks in line with the reversal from the July lows. While last week’s breakdown in EUR/USD to new year-to- date lows has garnered most of the attention, the price action for both the DXY and the JPM USD Index suggests the backdrop for the USD has improved on a broader scale."

"Note that both held critical support levels at their recent lows leading to the current strength. In this regard, the DXY held the key 79.70 support zone and 61.8% retracement of the May-June advance. As important, the JPM USD Index reversed from the critical 83.60/83.40 support zone which included the November low and the 76.4% retracement of the rally from the October ’13 low."

"Moreover, the price action has shifted with an impulsive tone suggesting the advance is developing with a trending bias. This improved tone suggests a growing risk of additional upside in the weeks ahead. The next key hurdles will be a critical test and should help define whether a more sustained advance can develop."

"The 80.90/81.02 June highs are the critical test for the DXY. In line with the impulsive reversal from the May low, upside breaks through these levels would imply another up-leg to this developing uptrend is underway. This break should allow for a closer test, if not break of the 81.39/81.48 January- November range highs. Importantly, the July lows should continue to hold to maintain this developing bullish framework."